Organizing your finances is a full-time job, some want to say. Avoiding facing their own disorganizations, people tend to rely on others. From housekeeping to finances, most people want to have a person for everything. But exactly how smart or a decision is that?
With so much free information widely available, you don’t need to hire a financial advisor – all you need is discipline and willingness to learn. Financial advisors will charge you whether they solve your financial concerns or not; they don’t have a crystal ball to predict the market, have legal protection, and limited accountability.
I for once thought about consulting a financial advisor when I was deep in debt. My poor judgment and “going with the flow” lead me to living way above my means, for the dumbest possible reason – everyone around me was doing the same!
After months of living paycheck to paycheck, I came across an article about frugal living and debt-free life. It was my introduction to the world of personal finance. I was like a kid at an amusement park; I searched for other articles, blogs, books, and podcasts to learn more.
In less than a year, I became debt-free. I started traveling while saving for a downpayment on a home and bought a car in cash—all without a financial advisor. Let’s dive into the reasons why you too don’t need a financial advisor.
Financial Advisors Don’t Need An University Degree
When you think about a financial advisor, you imagine a professional who can provide advice and solutions for all your money-related stress. The reality is very different. They come across more like salespeople instead of highly educated investment advisors. Their network and persuasive methods are way more important than sufficient training and education.
There are different rules for who can call themselves financial advisors.
While some states keep the laws strict, others don’t require a specific diploma in finance to use the “financial advisor” title.
You can lose precious time researching an advisor’s background and credentials, only to find out they are not required to have university degrees.
They Charge Unreasonable Fees
Here’s what you must know: Financial advisors will charge you whether they make you money or not. Their fees are not based on your profits.
So, think about it, if their pay doesn’t depend on your financial success, are they as invested in picking the best investments for you? All financial advisors work differently; some are commission-based, others are fee-only, or a combination of both.
There are several types of fees:
- Consultation fee – it’s charged upfront and covers the creation of your financial plan and preceding consultation.
- Management fee – a percent of the size of assets they manage. For example, if they handle your $50,000 portfolio and charge a 1% management fee, you’ll pay them $500.
- Annual fee – They might charge an optional yearly fee.
- Commission fee – some funds can provide a higher commission rate, and financial advisors can get paid to buy them. This means they’re working for their interest, not yours.
Financial Advisors Aren’t Familiar With New Concepts
You can get used to people rolling their eyes upon the mention of FIRE or early retirement, but what when a financial advisor does it?
Most financial advisors are not familiar and don’t know how to accommodate your needs regarding new, out-of-the-box concepts in finance.
Their specialty is conventional investments, and if you want to build a financial plan that will help you retire in less than 10 years, you might be better at figuring it out on your own.
You Want A Financial Advisor To Reduce Money Stress
Many people choose to hire a financial advisor just to get peace of mind. Leading a busy lifestyle, checking on your investments, and taking notes on how far your money has gone, sure is tiring. But how will paying someone, spending more money, help you relax?
Others opt for a financial advisor to solve financial problems with their partner – different opinions about investments, overspending, or mutual fear of running out of money.
These reasons are logical, but there’s work you can do yourself regarding the problems before meeting an advisor. At the end of the day, you’ll still worry about your money and investments.
Financial Advisors Use Fear As A Tactic
They got you into their office, crafted an excellent financial plan you’re happy with, and you’ve committed. What happens when you gain more money-managing confidence, pay off your debt and decide to invest independently?
They’ll try to make you their client forever. Here’s the catch; financial advisors, especially those who helped you ( read: sold you their service), will use fear-mongering as a tactic to keep you using their services forever.
They’ll compare the importance of their work to those of doctors! I once read an article where a financial advisor stated, “Would you perform an open heart surgery on yourself? If no, then why would you invest on your own?”.
The analogy is absurd; a fear-based relationship is not normal, especially when it comes to sensitive topics like money.
Investing is unknown territory for many, but some develop a love for investments and want to take matters into their own hands. Crushing their choices by using fear is disastrous.
They’ll Tell You That Investing Is Complicated
Investing should be simple; you need to make decisions you understand and have unbiased information about them.
No financial advisor will tell you this. They’ll try and over-complicate the process, using big words, scary numbers, additional products, and services.
You can create your portfolio yourself and even drive on autopilot – automate your savings, auto-rebalance your investments and make sure you are saving for retirement.
It sounds simple, but many people are scared of making a decision and rely on a financial advisor to guide them. It’s not necessarily bad, but it takes their power away and leaves them with a hefty bill.
You Don’t Have Much To Invest
The beginning of your financial journey doesn’t need to be with a financial advisor. Having a limited budget doesn’t accommodate the numerous fees.
Start by setting up simple rules as mentioned above and use your free time to learn about investing. There are tons of free educational materials, like courses and blogs you can read.
We’re not advising you on “winging it”; however, it’s wiser to save your money and invest it instead of paying a financial advisor.
Financial Advisors Craft The Fine Print
At your first consultation, you’ll sign a contract with your advisor that they craft. Of course, it provides utmost legal protection for them and none for you.
They’ll tell you that they hold a fiduciary duty, a commitment to act in your best interests and keep a legal and ethical relationship of trust.
While most of them do, you can never be sure that their numbers aren’t shaped to look more optimistic than they are. It’s tough to find out if your advisor is working in yours, not their best interest.
Most advisors have a network of referrals, from lawyers, accountants to real estate agents. They’ll recommend them whenever you need one but won’t disclose that they earn a commission whenever you use their services.
You’ll Save Money
Remember the example above, about the 1% fee, now imagine saving $500 a year only from your management fee.
A financial plan costs between $1,000 and $3,000, while the yearly fee can go from $100 a month to $7,500 a year! Just an hour with your advisor will cost you between $200 and $400.
Let’s do a simple calculation. You have $10,000, and you decide to hire a financial advisor to help you invest the money. Your initial consultation can be free, but the plan is $1,500. You’re left with $8,500.
They pick the best investments for you, and you’re all set! You get another meeting scheduled in a month, and you pay $300 out of pocket. Then a year goes by, and you get charged $2,000, plus $85 for managing your portfolio.
If your $8,500 gets hypothetically invested in an index fund with an 8% annual rate of return, you’ll earn $680 the first year – but you paid $3,885 to your advisor!
Frequently Asked Questions
How much do financial advisors make?
The median salary of financial advisors in 2019 was $87,850. The best-paid 25% of them made over $154,480 and the lowest-paid 25% made $57,780.
At what age do I need a financial advisor?
There’s not a particular age at which you need a financial advisor. When your economic life gets overwhelming, or you want to take off the burden of bothering with investments, it’s probably the time to look for help. If you’re considering big financial decisions, it’s good to consult a professional.
Should I get a financial advisor or do it myself?
It depends; if you’re not paying someone, would you take the responsibility and make the good financial decisions and diminish poor ones? If yes, then it’s best to do it yourself; you’ll save money and learn many new things.
Do I need a financial advisor for my IRA?
It’s not obligatory to use a financial advisor to set up your retirement funds. If you can’t afford one or have troubles trusting them, you’re completely fine managing your retirement plans on your own.
How to find a financial advisor?
Use your inner circle, ask for recommendations from people who seem to be doing good financially. Other great options are The Garrett Planning Network who offers a map of financial advisors who cater to the middle class, The National Association of Personal Financial Advisors, or opt for Robo advisors.
A financial advisor might be beneficial when you’re feeling overwhelmed on your financial journey or got a lump sum of money, like an inheritance. You can also look for a financial advisor charging per hour. This way, you’ll clear up some doubts and get advice without the long-term commitment.
Money is a sensitive and scary topic for many. The only person who has your best interest is you, especially when it comes down to finances and good choices. Whether you made some bad money decisions in the past or not, discipline and education will get you on track.
In the end, if you’re willing to put in work, broaden your financial knowledge, and have the freedom of taking care of your money yourself, you don’t need to hire a financial advisor.